In today’s economy, most of those selling real estate, whether they are homeowners or developers, are chopping prices in an attempt to unload their properties as quickly as possible. But a few developers are going against the grain — and raising prices.
The strategy may sound counterintuitive, but it’s being tested as more banks refuse to write loans in buildings that are less than 50 to 70 percent sold. To contend with that, as well as with buyers who are more hesitant than ever to purchase in preconstruction buildings out of fear the project won’t be finished or prices will continue to drop, some developers with condos set to hit the market this spring are trying to front-load sales. Their method is listing units at below-market prices and then increasing the price once a critical mass of units has sold.
“In a new development, you have to come in under market,” said Andrew Heiberger, developer of the Battery Park City condo conversion One Rector Park. “You can always increase prices later.”
One Rector Park is advertising “introductory pricing” starting at $800 per square foot. Heiberger declined to reveal what prices will increase to once the promotion is over. By contrast, at the nearby Riverhouse, the average price per square foot is $1,418 and at the Visionaire, it’s $1,269.
As the New York real estate market has slowed, price chopping has been the obvious solution for many sellers. But in contrast to other apartment sales, slashing prices at new construction condos carries a host of problems, including raising the ire of earlier buyers who paid more for their homes, said Heiberger, president and CEO of Buttonwood Real Estate.
“It’s not easy to decrease prices without creating the perception that it’s not worth what people paid for it,” he said. “You want to reward your first buyers with a price increase [for later buyers].”
Other developers have tried “price protection” programs that guarantee customers will be paid the difference if another apartment in the building sells for less than theirs. But so far, these programs have done little to allay buyers’ fears. Indeed, two of the first developments to announce price protection plans this fall — West Chelsea’s +Art and Williamsburg’s Steelworks Lofts — shuttered their sales offices weeks later.
With that in mind, developers of buildings coming online this spring are trying something different, said David Maundrell, president of aptsandlofts.com.
Maundrell said his strategy is to list new developments “at the bottom number the developer can handle, and then work from there, just to get some units into contract,” he said. “You have to get to that 50 percent mark.”
Once 50 or even 70 percent of the units are sold, buyers will have an easier time closing in the building, since banks are more likely to write mortgages in buildings that are mostly sold out. In part, that’s because Fannie Mae raised pre-sale requirements for new co-op and condo buildings to 70 percent starting at the beginning of last month. But once that bank threshold is met, developers can raise prices on the remaining units, even if they end up sitting on the market a little longer, or rent them out and sell them at higher prices when the market rebounds.
“When you get to 70 percent, hopefully you’re dealing with profit and you can make some good decisions,” Maundrell said.
His firm is employing this strategy at 268 Cumberland Street in Fort Greene, which went on sale in February with one-bedrooms starting at $475,000. Within three weeks, four of the eight units were sold. “We went out at bottom-line pricing, and we had 35 people at the first open house,” said Maundrell, adding that he plans to raise prices once a few more units are sold.
In the past, developers sometimes offered lower preconstruction prices to some early buyers. But this time around, things are different. Rather than offer a special deal to a few early buyers, developers are listing many of the units in their buildings for sale at much lower prices than they had planned, sometimes barely breaking even. This is far from ideal, but for many developers, it’s the only way to unload the units and get themselves out of the financial woods before increasing prices.
Until now, the low prices being offered would have been unthinkable for many developers. Developers’ loans often stipulate that apartments must be sold at certain price points, and lenders are traditionally unwilling or unable to change the terms of the loan, especially when it means less profit, not more.
Some developers “can’t take any less and it doesn’t matter where the value is,” said Angela Ferrara, director and vice president of sales at the Marketing Directors. She noted that some developers owe more to the bank than the building is worth.
But in recent weeks, lenders and developers have become more flexible as awareness of the severity of the market downturn has spread. Ferrara said the Marketing Directors has recently begun meeting with clients’ lenders, hoping to convince them to renegotiate the terms of developers’ loans or allow them to sell apartments at lower prices. “We tell them, ‘It’s going to be a trade-off,'” she said. “‘Renegotiate your terms or you’re going to carry those homes until the value returns.’ We’re seeing some banks being more realistic, and others not.”
She noted that both banks and developers are more likely to be persuaded to offer bottom-line prices at the beginning once they realize they can raise prices after a certain number of units have been sold.
Vesta Hoboken, one of the Marketing Directors’ New Jersey developments, opened in late January with a 10 percent discount, but only for buyers who signed contracts before March 15. The discount brings average prices of units in the building to roughly $450 per square foot.
“We’re trying to get early buyers to get on board,” said Jacqueline Urgo, president of the Marketing Directors. “Banks want to see the success of the building.”
Within six weeks, five of Vesta’s 16 units were under contract, said Christine Protomastro, the sales manager at the building. “We’re really priced right,” she said. “That was a definite incentive — we’ve gotten contracts faster because of it.”
But banking on increasing prices down the road has its risks in a declining market. Since no one knows how severe the real estate downturn will be, there’s no guarantee that developers will be able to sell units for higher prices later on, or that the discounts they’re offering will be enough to entice early buyers.
At the Piano Factory in Astoria, one of Prudential Douglas Elliman’s new developments, prices are lower than the company projected a year ago. Prices in the building average around $672 per square foot, with units starting at $270,000, according to StreetEasy.
“We’re going out with prices that are right for today’s market,” said Andrew Gerringer, managing director of the development marketing group at Elliman. “You’ve got to be realistic.”
But a key element of Piano Factory’s strategy is the hope that it will be increasing prices later, as more units are sold and the market improves over time. “Over time, we’ll be able to raise prices as we go,” said Gerringer.
At another of the Marketing Directors’ buildings, Crystal Point in Jersey City, the developer is offering discounts of up to 7 percent off for early buyers, with plans to increase prices later in the process, said Ferrara.
She added that it’s somewhat easier for New Jersey developments to change prices during the sales process, since they don’t have to make an amendment to the offering plan as developers do in New York State.
Julia Boland, a senior vice president at Halstead Property, found a way to get around that at the 89-unit 2280 FDB (Frederick Douglass Boulevard) in Harlem, where she is handling sales. Developers of new construction typically offer a mix of different kinds of units for sale at a time, hoping to sell out the building evenly. But Boland felt it was more important to offer lower-priced units first. So she chose the units in the building she felt offered the best value, enabling her to advertise “preconstruction pricing” ranging from $365,000 to $1.889 million.
“What we did is picked out all the apartments that were the lowest price in the [offering plan], and released those first,” she said.